Gordon Brown moved to defuse backbench criticism of a growing north-south economic divide with a new £1bn venture capital fund to kick-start innovation and job creation in the regions as well as Scotland and Wales.

With the government under attack over near-standstill budgets for eight new English regional development agencies (RDAs), the chancellor pledged to work with the business-led RDAs to achieve "balanced economic development" across Britain with a modern regional policy.

The extra cash will come from a partnership between the government, business and the European Investment Bank, he said.

Derek Mapp, chairman of the East Midlands RDA and spokesman for the eight agencies, said they expected that the new fund would initially be spread over three years with the government providing £250m - possibly by amalgamating existing schemes - with business contributing another £250m and the EIB £500m.

"Instead of a disparate approach where different government departments are doing different things they are saying let's get all this linked together with quite a lot of new money," he said. "This is probably the first attempt at some regional dispersal and it will allow us to leverage in a significant amount of extra funding with the government providing the necessary security."

Mr Brown announced provisional regional targets in England, amounting to £835m - with the remaining £165m presumably going to Scotland and Wales. He said £85m would go to the south-west; £120m to the north-west; £130m to the north-east and Yorkshire; £250m to the midlands and the east and £250m to London and the south-east.

The chancellor also said that the trade and industry secretary, Stephen Byers, would next week be announcing a regional innovation fund to help the formation of local "clusters" for hi-tech industries - along the lines of successful growth centres around Cambridge and the M4 corridor.

But the government is certain to face criticism that its rhetoric does not match the economic reality on the ground. Last week's decision to bow to pressure from the Wellcome Trust by agreeing to relocate the £500m government-funded Diamond synchrotron project in Oxfordshire - rather than underpin its present successful base in Cheshire - is seen by many backbenchers, leading scientists, and the North West RDA, as a blow to regional policy by encouraging southern clusters at the expense of the north.